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China: "Mother of All Black Swans"

According to Director of Research at Investment Management Associates Inc., Chinese government intervention, corruption and political capital-allocation decisions take things to a new level of financial insanity. If, or when, its economy slows down, China will be the Mother of all Black Swans, Mr. Katsenelson warns.

“The Chinese government lies. The government cares deeply about ideology: it censors media and internet, sends people to jail for writing anti-government articles. Making up GDP numbers is just one of many tools.”

Vitaliy Katsenelson

Chinese late-stage growth obesity have resulted in significant overcapacity, according to the report.  The economy grew at 10% (real growth) for 10 years. When now building new plants,  assumptions are made that the past growth will  continue into the future.

Mr. Katsenelson points out that the natural demand for its goods from the developed world now is lower as the global economy is still contracting.

But demand is driven, in large part, by heavy borrowing by US and European consumers – China provided the financing.

“Similar to Lucent financing dotcoms that were buying Lucent’s equipment.”

“Future growth will be significantly lower– China’s customers (the US and Europe) are overleveraged and are deleveraging.”

Chinese analysis can be divided into three periods, the researcher writes:

1.Pre-crisis –1998-2008 – (Late-Stage Growth Obesity).

2.During crisis –2008 (Q4) -2009 (Q2) – (You Lie!).

3.Post-crisis –2009 (Q2) -today – (SuperSteroids-R-Us).

Will do anything to grow its economy

“Farmers moved to cities in search for jobs. No social safety net – lose a job, no unemployment insurance, hospital only accepts cash. This explains the high savings rate.”

“Hungry people don’t complain, they riot – government is afraid of political unrest.”

“Chinese chose growth at any cost, even if it was profitless, with bad loans and uneconomical projects.”

“Once you look at what’s taking place in the Chinese economy through this lens, the decisions of its leaders start making sense, or at least become understandable.”

“Analyzing the Chinese economy while it is growing at superfast rates is like analyzing a bank during an economic expansion– all you see is reward. But the defaults –the risk – are masked by constantly increasing new business that is profitable at first (or did not have a chance, yet, to default). The true colors of that growth only appear after the economy slows down and new accounts mature.”

Consequences Of A Bust

So, what will happen if (or when) the Chinese bubble bursts? Investment Management Associates paints a pretty ugly picture:

“What happens in China doesn’t stay in China (not any more); it spills over to the rest of the world.”

“China will turn from a windin the sails of the global economy to its anchor.The impact will be felt in many, and unsuspected, places.”

“It will tank the commodity markets, commodity producers, and commodity-exporting nations.(Incremental demand from China collapses, oil prices follow, taking the Russianand Middle Eastern oil-centric economies with it). According to GaveKal Research, China accounts for 15% of Brazil’sexports (up from 1.5% a decade ago).”

“Demand for industrialgoods will fall off the cliff.China consumes a lot of those goods –$550 billion worth annually (according to GaveKal Research).”

“Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boostingour interest rates higher. No more 5% mortgages and 6% car loans.”

“Political instability in China is a possible outcome from a significantly weakening economy.”

A Chinese Snapshot

“There’s currently 30 billion square feet of Chinese real estate in the works, which would work out to a 5×5 cubicle for every man, woman, and child in the country.”

(Jim Chanos)

Check out the full China-report from Investment Management Associates Inc.


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Dubai: "A Change of Scenery"

The Dubai collaps marks a change of scenery in the financial crisis that’s been lasting for over a year. It’s being compared with the Lehman collaps, and signals new times with new problems. Here’s a collection of the most resent analysis of the situation i The United Arabic Emirates from the worlds leading experts at Goldmans Sachs, Barclays, Standard & Poor’s, Danske Bank, and others. 

 

“Dunai’s default will have serious implications for the global risk trade, especially in emerging markets. Thus far at the time of the writing of this report, the risk trade has begun unwinding with Asian markets having taken a huge hit and S&P futures down over 40 points.”

The Firecracker Report

(Article in Norwegian, links to analysis in English.)

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Krisen i Dubai markerer et sceneskifte i den økonomiske krisen som har pågått i over ett år. Dubai-kollapsen blir sammenlignet med Lehman-konkursen , og varsler nye tider med nye problemer. Her er de siste analysene fra Goldman Sachs, Barclays, Moody’s, Paul Krugman, Danske Bank, m.fl.

 

New York Stock Exchange aktivert fredag regel nr.48 i børsforskriftene som gir børsen lov til å stanse handelen i enkeltaksjer eller i hele  markedet dersom volatiliteten blir for stor.

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NYSE aktiverte regel 48 fire ganger i 2008 (22. og 23. januar, og 11. mars), men den eneste gang den ble brukt var etter kollapsen i Bear Stearns 17. mars i fjor.

Selv om det amerikanske aksjemarkedet var stengt fredag, hoppet volatilitetindeksen VIX over 20 prosent.

Det er bevegelser i rente- og valutamarkedet.

Japanske yen stuper, mens euro styrkes markert.

Prisen på Credit-default Swaps, som brukes for å forsikre statlige gjeldspapirer, på full fart opp i land som Hellas, Latvia og andre som har stor offentlig gjeld og svak økonomi.

Hva som skjer når markedene åpner mandag vet ingen.

Vi får de første signalene når handelen starter i Asia natt til mandag.

(I tilfelle: Her er linken til New York-børsens ”circut breaker”

Tredelt problem

Situasjonen er stadig like uklar etter at nabo-emiraten Abu Dahbi delvis har trukket tilbake sitt løfte om krisehjelp til Dubai.

Problemet er – som Bank of America påpeker – tredelt:

  • Hvem skylder hvor mye til hvem?
  • Når kan man forvente at lånene blir betalt?
  • Hva skjer om de ikke blir betalt?

Analytikere over hele verden sitter i øyeblikket med sine modeller og tabeller for å finne ut hva dette vil medføre og som kan bli worst case scenario.

Vi har samlet noen av de siste analysene og kommentarene fra noen av verdens fremste eksperter.

Her kan du studere dem en etter en.

Siste analyser og kommentarer:

Barclays

–          Nyheten om betalingsproblemer i Dubai kommer som en overraskelse og har fundamentalt endret vårt markedssyn, skriver den britiske storbanken.

”Surprise, surprise”

Paul Krugman

”Dubai or not Dubai”, skriver økonomiprofessor og Nobelprisvinner Paul Krugman på sin blogside i New York Times.

Spørsmålet er hvor mange andre ”Dubai-er” det er blant de sju arabiske emiratene.

”Rashomon in the desert”

Moody’s

Kredittvurderingsbyrået Moody’s reagerte umiddelbart med å nedgradere både de statige og private verdipapirene i Dubai.

Moody’s peker på at mange virksomheter og prosjekter er avhengig av statlige midler.

”Moody’s downgrades Dubai GRI ratings”

Standard & Poor’s

“In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.”

“Several Dubai Government-Related Entities Downgraded And On Watch Negative Following Debt Restructuring Announcement”

Danske Bank

–          Dubai signaliserer først og fremst et sceneskifte – et skifte som for aksjemarkedet består av nytt focus på bankenes utlånstap etter kreditthjelpen og bankboomen i 2009, skriver Danske Bank.

Sjefanalytiker Morten Kongshaug mener banktapene vil fortsette å vokse utover i s009, og kanskje inn i 2011.

“A Greek tragedy in Dubai”

The Firecracker Report

Risikoanalytikerne som blogger på nettstedet ”The Firecracker Report” har følgende konklusjon:

“DUBAI‟s default will have serious implications for the global risk trade, especially in emerging markets. Thus far at the time of the writing of this report, the risk trade has begun unwinding with Asian markets having taken a huge hit and S&P futures down over 40 points. Given that stock and commodity markets were already feeling heavily overbought, coupled with this crisis, markets could be in for a severe correction (unless of course Dubai announces a rescue plan for bondholders on Monday – unlikely in our opinion). It will be interesting to watch how far the U.S. Dollar index rallies in the coming days – whether it breaks above its 50 day moving average of 76. That will be a key indicator of the extent of the dollar carry trade. A lot of short dollar players could be in for a nasty squeeze.”

“Dubai Default Examined: Serious Implications for the Global Risk Trade, Especially in Emerging Markets”

Goldman Sachs

Goldman Sachs nevner ikke Dubai sin ukentlige analyse til sine kunder.

Men banken skriver at den venter fortsatt oppgang i det europeiske aksjemarkedet, men svakere enn den har vært til nå.

Sentimentet er mest positivt for basisråvarer, og dårligst for teknologisektoren.

Goldman Sachs anbefaler følgende strategi i kommende uke:

” Defensives beat cyclicals; large cap beat small cap; growth beat value.”

“Europe Weekly Kickstart”

Mulighetene for at det blir en ”kickstart” på kommende børsuke er absolutt tilstede.

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